Evaluating and Selecting a Financial Advisor

I recently attended the wedding of a friend who asked a really good question, one that many other people are probably asking these days. We had been standing in a group at the reception, talking about retirement and money matters. During the conversation, two of those present mentioned that they were “financial advisors”. One was a stock broker at a big name firm in New York City. The other was a Certified Financial Planner ™ at an independent boutique firm in a small town. My friend listened to these advisors talk about money and investing and later took me aside and asked me to explain what it meant to say that one is a “financial advisor”. He mentioned that at age 42, he was interested in getting financial advice regarding his retirement plan at work but that he also had questions about refinancing his home, buying a vacation property and a business opportunity he was considering. He wanted to find someone to work with that he could trust to give him objective advice and he wanted to be able to invest his retirement plan money wisely.

I had been asked this question before, many times. By now, I have concluded that the public has not been educated enough about what it means to be a “financial advisor” and what credentials are required to call oneself a “financial advisor”.

The simple answer is that there are no credentials required to call oneself a “financial advisor”, because it is a generic term, like “medical professional”. What does “medical professional” mean, anyway? It could mean doctor, lab technician, pharmacist, veterinarian, dentist or a variety of other people engaged in providing some kind of medical service. Similarly, a “financial advisor” could be a stock broker, an insurance agent, a realtor, a banker, a financial planner, an accountant or an investment advisor.

Anyone can call himself or herself a “financial advisor” and hang up a shingle, sit in an office and give advice, but not everyone who does that is qualified, competent, objective, unbiased or even legally allowed to do it. Regulations are increasingly being passed to restrict unqualified people from the business of giving financial advice, largely because it generally does include advice about investing, which is already strictly regulated and cannot be legally provide by individuals that are not licensed and registered with state or federal authorities to give investment advice.

Nevertheless, the problem experienced by many people when they realize that getting financial advice would be a really good idea is that they do not know which type of advisor to hire and how to find someone that they are comfortable with, can trust and are certain will put their best interests first. Solving this problem is easier if you know what each of these advisor-types actually does, what qualifications they possess, how they get paid and whether or not they are independent or employed by a big firm. From this, you can decide for yourself which type of advisor to seek out and hire. So, who does what and what does that mean to you, the person seeking advice?

Bankers are not financial advisors in the true sense. As bankers, they want your business, either as a deposit account or a loan. They make money from interest you pay on loans and fees you pay on deposit accounts. They use the deposit accounts to fund the loan accounts, within the guidelines required by the banking regulations. Some banks have employees who sell insurance and investments also, and a few have trust departments. These departments make money from commissions charged to customers who buy the insurance products and investments from the bank, and from fees charged for managing the trusts that the banks set up for customers. If a bank employee who sells insurance or investment products on behalf of the bank also gives investment advice to a customer, that employee must be a representative of a registered investment adviser firm, usually a subsidiary of the bank and must meet the fiduciary standard of care, disclosing all sales commissions and/or fees resulting from the sale of investment products offered by the bank. This means that they must provide, in writing, full disclosure of all conflicts of interest as well as costs and put the best interest of the customer first, before the interests of the bank or subsidiary firm.

Insurance agents represent either one company (a captive agent) or act as a broker for a range of companies (independent agent). Most are not financial advisors in the strictest sense, either, although they are certainly competent to advise about insurance plans, which are part of the overall puzzle of a total financial plan for most people. The make money from the commissions they receive for the insurance products they sell to customers, which comprise life, health, property, liability, casualty and annuity policies. Insurance agents who give investment advice are also required to be representatives of a registered investment advisor firm and must be fiduciary. They must likewise disclose all costs, putting all conflicts of interest in writing and be able to demonstrate to regulators that their advice is in the best interest of the client, ahead of the interests of the insurance company.

A registered representative (stock broker) is an agent of a broker-dealer firm who sells investment securities to customers on behalf of the broker-dealer firm. A broker is the sales agent and the dealer is the distributing firm for a variety of investment securities. These securities are stocks, bonds, mutual funds, exchange traded funds, money market funds and sometimes commodities, hedge funds and private equity funds. Stock brokers are paid a commission for products sold to customers, to create income for the firm they represent, which pays them the commission on each sale made. Stock brokers like to refer to themselves as financial advisors because they recommend and sell investments to clients. However, under the new regulations just passed this year (2016), stock brokers who give investment advice must first register as investment advisor representatives and meet the requirements of the fiduciary standard of care when rendering advice to a client or prospective clients. This fiduciary standard of care requires that any/all conflicts of interest be minimized or eliminated and disclosed in a written contract before rendering any advice. In addition, any advice rendered must be in the best interest of the client, not the stock broker or his/her firm and the compensation he/she will receive must be reasonable, not excessive. According to Blaine F. Aikens, CFP®, CFA, AIFA, who is the executive chair of the well-respected firm fi360, “By law, brokers are in the business of facilitating transactions, not giving advice. By society’s definition, advice is a fiduciary function. A product distributor and a professional adviser are two distinct occupations – not two different business models within one occupation, just as pharmacist and a physician are in the same field but not in the same occupation.” A broker-dealer firm must register as such with state or federal regulatory agencies in order to operate as a business.

An accountant is a professional who specializes in bookkeeping, sophisticated accounting services, payroll, taxes and business planning, specifically related to the income, expense, taxes, profits and cash flow needs of an individual or a business. They are financial advisors in these areas of expertise, because they charge a fee for their services and do not sell products, but they generally are not investment advisors and should not render investment advice unless they register as investment advisors. If they do this, they must also now put on a second hat, that of investment advisor as separate from accountant and meet the fiduciary standard of care when rendering advice to clients. The highest level of competency in accounting and taxes are Certified Public Accountant for the sophisticated forms of accounting, and Enrolled Agent for tax experts that can represent someone before the IRS in tax court. Accountants generally are paid by the hour or on a retainer for ongoing services provided.

A financial planner is a professional who advises clients on their total financial well-being, including budgeting, savings and investments, retirement planning, college funding, divorce settlements, estate planning and tax planning. CFP® professionals frequently build and manage a portfolio of investment securities for clients, using a custodian to safe keep the portfolio, as required by law. Tax planning and estate planning are always done in cooperation with a tax professional and attorney, on a team basis, for clients with comprehensive financial planning needs. In the past, anyone could call themselves a financial planner, including sales agents such as insurance agents, bankers, stock brokers and accountants, sometimes even attorneys, but per current regulations that are only expected to get even stricter, it is no longer permitted unless the professional using that term is, in fact, a Certified Financial Planner™ or CFP®.

CFP® professionals receive accreditation through a rigorous process of education and exams that are nationally accredited by the Financial Planning Board of Standards in the US. Courses are offered through the College of Financial Planning, which requires an undergraduate degree and applicable financial industry work experience prior to admission to the course curriculum and at numerous universities as a master’s program. CFP® professionals are automatically subject to the fiduciary standard of care when advising clients and must adhere to the strictest code of ethics in the financial services industry. Most are also registered investment advisors and many are fee-only, meaning that they charge a fee for advice and do not sell products to clients. Investment products recommended by this kind of financial planning professional are therefore unbiased, free of the conflicts of interest that would otherwise be inherent when sold for a commission. Of course, advice given by a CFP® professional must meet the fiduciary standard of being in the best interest of the client. Most fee-only CFP® professionals recommend no-load (no sales commission) investments such as mutual funds or exchange traded funds and work with low cost, independent custodians for the investment accounts held by their clients. CFP® professionals are paid a fee charges on an hourly basis, an annual retainer or as a percentage of the value of the assets managed (if the client has an investment portfolio).

A registered investment advisor is, in the strictest sense, a firm that gives investment advice through employees or partners in the firm, who are frequently CFP® or CFA accredited, or are attorneys or certified public accounts who have, in addition to their accounting and law credentials, passed additional exams that allow them to render investment advice to clients. A CFP® is deemed to have already met these exam requirements and is therefore not required to pass additional exams to qualify. All registered investment advisors are automatically subject to the fiduciary standard of care and must always act in the best interest of the client over the firm’s interests, putting the client first in all circumstances. Investment advisor firms must register as such with state or federal agencies, depending on the size of the firm. Investment advisor firms charge fees for the advice and services they provide to clients, usually on a percentage of investment assets being managed by the firm, but some charge a retainer or an hourly fee for their services instead of a percentage fee. A few firms charge some kind of combination of hourly, retainer and percentage fees.

Most CFP® professionals choose to work with an investment advisor firm rather than a broker-dealer firm, because of the requirement to be a fiduciary, which the broker-dealer is not and cannot provide them. The code of ethics, the standards of the profession and the general structure of an advisor firm that is not a fiduciary make it impractical not to affiliate with a registered investment advisor firm. Under the newest regulations, broker-dealer firms who sell products and want to render advice to clients will need to change the way they do business, pay their brokers, price the products that they sell and disclose any conflicts of interest that result from the advice they render, in writing. These new regulations are being referred to as the “fiduciary rule” (even though they consist of more than one rule change) and have been enacted in order to protect the public, especially retirement plan participations, from excessive costs and undisclosed fees associated with investing that have been the norm in the past.

It is okay to interview the financial advisor(s) that you are considering hiring before hiring him or her. In fact, it is recommended and considered the norm, to insure that you hire the right person for you and your particular needs. You can find a competent financial planner at the website: www.letsmakeaplan.org , a not-for-profit professional organization that lists financial planners in a nationwide database. There is no charge for this information.

Which kind of financial advisor you choose to hire is up to you. Each has something to offer the public, depending on what needs the individual has. Most people seek out financial advice because they are concerned about something, usually retirement, but it is also sometimes the bigger picture, like what to do with the money they earn or have accumulated over time, how to reduce or eliminate debt, how to finance a business, how to accumulate savings, how to finance college expenses, investments that minimize or reduce taxes, how to structure a divorce settlement that is fair and what to do in order to leave their assets to their heirs in an orderly fashion that matches their own values.

Is your firm a broker-dealer, an insurance company or a registered investment advisor?

How is your firm paid? How are you paid?

Are you or your firm a fiduciary who will put my best interests first and state that in writing?

What services can you offer me?

What credentials do you have to provide me with the services you offer?

What are your fees?

What must I do to hire you?

What must I do to fire you?

Do you or your firm have to disclose any conflicts of interest if you work with me? If so, what are they?

Do you sell products? If so, what are they?

Do you do not sell products, do you recommend them? If so, what are they?

Will you work cooperatively with my tax, accounting and legal professionals?

This is certainly not an exhaustive list of all of the information available about the subject of “financial advisors”. It is a good start, however, and sufficient to provide most people a road map to finding and hiring someone to help them through the maze of financial decisions, choices and strategies that are absolutely necessary to the financial well-being of all of us in this most complex and dangerous world in which we live and earn money. We know you need advice. According to TIAA-CREF, one of the largest and most respected providers of low-cost investment advice to retirement plans in the US, their studies of affluent individuals/families concludes that most agree that they should seek financial advice throughout their working lives, not just at retirement. We agree.

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